Nicholas Carr's blog

Jeff Jarvis’s cockeyed economics

Jeff Jarvis, the popular media blogger, has long ridiculed newspapers for trying to find innovative ways to charge for the stories they publish online. True to form, he had a kneejerk reaction to the New York Times’s plan to ask frequent readers of its digital content to buy a subscription. Jarvis argues that in seeking to charge its “best customers,” the Times is guilty of “cockeyed economics”:

So why charge your best customers? Why single them out? Why risk driving them away? The logic eludes me. So do the economics.

But it’s Jarvis, not the Times, whose economics, and logic, are askew. Jarvis might want to spend some time reading about the fundamentals of pricing, particularly Hal Varian’s classic work on the “versioning” of digital goods. Varian is a distinguished economist who teaches at Berkeley and is also now Google’s chief economist. Here’s a little of what he says about “versioning information goods,” which is extremely pertinent to the Times’s strategy as well as the news and media business in general:

One prominent feature of information goods is that they have large fixed costs of production, and small variable costs of reproduction. Cost-based pricing makes little sense in this context; value-based pricing is much more appropriate. Different consumers may have radically different values for a particular information good, so techniques for differential pricing become very important … [One] particular aspect of differential pricing [is] known as quality discrimination or versioning … The point of versioning is to get the consumers to sort themselves into different groups according to their willingness to pay. Consumers with high willingness to pay choose one version, while consumers with lower willingnesses to pay choose a different version. The producer chooses the versions so as to induce the consumers to “self select” into appropriate categories …

[Consider the case] in which the seller knows something about the distribution of willingness to pay [WTP] in the population, but cannot identify the willingness to pay of a given consumer. In this case the seller cannot base its price on an exogenous observable characteristic such as membership in some group, but can base its price on an endogenous characteristic such as the quality of the choice the consumer purchases. The appropriate strategy for the seller in this situation is to choose two qualities and associated prices and offer them to the consumers. Each of the different consumer types will [select] one of the two quality/price pairs. The seller wants to choose the qualities and prices of the packages offered so as to maximize profit.

The intention is to get the consumers to self-select into the high- and low-WTP groups by setting price and quality appropriately. That is, the seller wants to choose price/quality packages so that the consumers with high WTP choose the high-price/high-quality package, and the consumers with low WTP choose the low-price/low-quality package.

The Times’s plan is, obviously, a variation on this versioning strategy, where the quality variable that is being controlled is the number of stories available to be read in a month. By establishing a volume-based trip wire for a paywall, the Times introduces a mechanism that requires its readers to self-select based on the value they perceive in the Times’s offering and hence their willingness to pay.

Such versioning strategies have proven very successful for many digital goods. Software companies routinely use versioning to segment their customers and optimize their profits, and many cloud services – such as Google Apps – are also following the strategy. The common thread through the strategies is that the “best customers” pay more, while the “worst customers” pay little or nothing. When news stories or other media products are digitized, they also become candidates for versioning strategies. If news organizations don’t experiment with versioning plans, they’d be foolish.

The only thing cockeyed about the economics of the Times’s plan is Jarvis’s view of it.

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10 thoughts on “Jeff Jarvis’s cockeyed economics”

I cannot tell you how much my heart leaps up to see the Jarvis jerking knee on this issue called for the BS it is. It sometimes seems as if he got a couple idee fixes in 2003 and just stayed there. His influence is far out of proportion to his actual insight.

The fuss about ‘punishing your most loyal readers’ is more than a little odd, since price discrimination based on value is a basic economic concept. Those who benefit most from a service are willing to pay for it.

What bugs me about the NYT paywall is that you’re paying for a bundle of commodity news and premium, unique content. It may be impossible for newspapers to untangle that bundle, but my feeling is they’ll go extinct if they don’t. The NYT paywall just puts off that task.

I happily pay for premium content (NYRB, New Yorker, Harper’s, etc…) but I have a hard time believing that commodity news will work on a paywall basis. Plus there’s the attendant public good of freely available commodity news, especially pronounced in the less developed world.

The real problem with the NYT plan is that there is a glut of newspaper-style information, and the NYT’s content quality is not actually any better than the free content you can get from other sources (and arguably worse), unlike, say the Wall Street Journal or The Economist.

Only premium content can command premium prices (i.e. anything more than free). The NYT’s journalism was badly damaged by Judy Miller, Jayson Blair, the Wen-Ho Lee or NSA wiretap scandals, and does not command anywhere near the respect they seem to believe they still deserve. The only usefulness of the NYT is as a barometer of what the establishment thinks, not of what is actually going on.

The NYT could hope to wait out the inevitable consolidation of the newspaper industry, which would solve the glut of free information, except that their cost structure is so high they are actually less likely to be one of the survivors. In any case, if that is their logic, the decision to charge for content is premature.

Fazal, that, of course, should be for the market to decide. And if there’s nothing that the NYT can do to differentiate its content, and the price that people are prepared for it is zero, then there’s no business there for them in the long run anyway.

Commodities for which no one is prepared to pay are not sustainable for a business. Differentiate or die.

A collection of best of breed will win out rather than point products/media subscriptions. I want one bill.

And people will pay. I remember when the Internet moved out of academia and into the world, people swore left and right that advertising would not be tolerated by the community. We know how that turned out. Nothing is written in stone, it’s a fluid medium and so are the business plans.

The bundled strategy might work for a while, but things change and will continue to change. And this is the most fascinating topic around – what will be the new business model for media? If anyone figures it out we all figure it out — it’s an open source event.

I think the future media business mdel will be a ‘Heinz 57’ model – many, multiple revenue streams — tough to manage and maintain but that’s what will sort out the winners.

And I love the irony, that as a journalist, I’m in a very bad place to try and make a living — but it’s the most interesting story around.

I agree completely. Information should be priced using “open contracts.” The Wall Street Journal has a fixed — and rather large — subscription price. I argue that they could make more money if they let individual subscribers value the content relative to their own perception of it’s worth.

Nick, I like this post a lot, thanks. I do agree that the Times is doing the right thing by experimenting with different systems. At least they’re trying.

But I’m not sure I follow your entire argument — why is it likely that frequent readers of NYTimes.com are also high-WTP customers? Sure, they obviously have a great love of the Times brand. But do they value that brand so much that they’d suddenly pay up? For example, it is very easy to find alternate news sources on the Web for free. I’d be concerned that these frequent readers would opt for free news sources before they pay for the Times, despite the value they place on the NYT brand. If you don’t buy that argument, here’s another one, which I’m sure you’ve heard: there are holes to the Times’ proposed pay system that, if not patched up, would make it easy for users to access that same content for free. For example, users might not be charged ever if they arrive at the Times’ site via blogs or other external referrals. More on that here: http://goo.gl/sLpy

So, to sum it all up, I’m not convinced that there are not enough readers who value the Times so highly that they’d make this new pay system a lucrative one for the company. But, I guess we’ll have to wait and see.